King Says BOE Keeps QE Option Open on Subdued Recovery: Economy

Light trails made by passing vehicles are seen outside the Bank of England in London. Photographer: Matthew Lloyd/Bloomberg

Nov. 14 (Bloomberg) -- Bank of England Governor Mervyn King
said the U.K. economy may shrink in the current quarter and its
recovery will be subdued, prompting officials to keep open the
option of further asset purchases to aid growth.

“We face the rather unappealing combination of a subdued
recovery with inflation remaining above target for a while,”
King told reporters in London today. “There are limits to the
ability of domestic policy to stimulate private-sector demand as
the economy adjusts to a new equilibrium. But the committee has
not lost faith in asset purchases as a policy instrument, nor
has it concluded that there will be no more purchases.”

The Monetary Policy Committee halted expansion of its bond-purchase program of quantitative easing last week after some
officials raised doubts about the effectiveness of the program
and others highlighted inflation risks. King spoke an hour after
data showed unemployment unexpectedly rose in October, and as
the central bank released its quarterly Inflation Report showing
lower forecasts for U.K. economic expansion and a heightened
risk of “persistent low growth.”

The economy will continue its recent “zig-zag pattern”
and “may shrink a little this quarter” after 1 percent growth
in the three months through September, King said.

“The road to recovery will be long and winding,” he said.
“But there are good reasons to suppose that we are travelling
in the right direction. The committee stands ready to do
whatever it can to keep us on the right path.”

Income Transfer

The pound pared its advance against the dollar after the
report and was little changed at $1.5869 as of 12:36 p.m. in
London. The currency has risen about 8 percent on a trade-weighted basis in the last 17 months, which King said was “not
a welcome development.”

King fielded multiple questions on the announcement last
week that the central bank will transfer income from gilts it’s
purchased to the Treasury, a move that the governor equates to
an easing of monetary conditions. He said the BOE’s new
forecasts are based on asset purchases at 375 billion pounds
($595 billion) and the assumption that 37 billion pounds will
flow to the Treasury in the coming year through the new
arrangement, and smaller amounts after that.

The projections also assume no increase in the benchmark
interest rate from its current level of 0.5 percent until the
fourth quarter of 2015.

Controversy on the shift in cash and questions on whether
it presents a risk to the central bank’s independence in setting
monetary policy are a “fuss about nothing,” King said today.
“I don’t think it affects anything very much.”

BOE Forecasts

The Bank of England sees annual quarterly GDP growth of
about 2 percent in two years, according to projections published
as fan charts with the report. The bank will publish the data
underlying the projections next week.

It also forecast that inflation will be at about 1.9
percent at the end of its forecast period and downplayed the
potential impact of low productivity growth on prices. While it
raised its near-term inflation projections from August, it said
the risks to price growth being around the 2 percent target in
the medium term are “broadly balanced.”

The central bank noted that there is a range of views among
the nine-member MPC for the outlook for inflation and it said
the recovery will be “sustained, but slow over the next three
years.”

“The weaker GDP profile reflects the judgment that the
broader causes and repercussions of the financial crisis may
bear down more forcefully on demand and productivity than
assumed” previously, the central bank said. “There seems a
greater risk that the U.K. economy may be in a period of
persistent low growth.”

Euro-Area Crisis

The euro-area debt crisis remains the biggest risk to the
U.K., according to the central bank. Data today showed
Portugal’s economy shrank for an eighth quarter and unemployment
rose, data today showed, while Greece’s economy contracted for a
17th straight quarter amid austerity measures tied to the
country’s 240 billion-euro ($306 billion) bailouts from the
European Union and the International Monetary Fund.

A report from the U.S. today will probably show retail
sales fell in October for the first time in four months as
superstorm Sandy kept consumers in the Northeast away from
stores, economists said in a survey. The projected 0.2 percent
drop in purchases would follow a 1.1 percent gain in September.
The Commerce Department will release the figures at 8:30 a.m. in
Washington.

Jobless Report

The Bank of England also said today that higher energy
costs may damp spending, while the government’s fiscal squeeze
is adding to pressure on the economy. The recent strength of the
pound is affecting companies’ competitiveness, it added.

Data today showed that U.K. jobless claims rose at the
fastest pace in more than a year and job creation slowed.
Jobless-benefit claims increased 10,100 to 1.58 million in
October, the most since September last year, the Office for
National Statistics said. The median of 28 estimates in a
Bloomberg News survey was for no change.

Employment based on International Labor Organization
methods rose 100,000 in the three months through September, half
the pace of the previous period, as a boost from the London
Olympics began to fade.

Data yesterday showed inflation accelerated more than
economists forecast in October due to higher university tuition
fees. Consumer prices rose 2.7 percent from a year earlier, the
fastest since May, compared with 2.2 percent in September.